A short sale is the sale of a home for less than the balance owed to the original lender. Short sales are commonly used by homeowners to avoid foreclosure, but both lender and borrower must agree to the short sale. Banks prefer short sales because they are generally less costly than foreclosures. A short sale allows the lender to recover some of their original loan while the homeowner does most of the leg work in selling the property. When a house has been foreclosed on, the homeowner no longer owns the property and the lender must finance the cost of selling the property on their own.
Before requesting approval from the lender to proceed with the short sale, the homeowner should be aware of every possible outcome. On the one hand, the lender may agree to forgive the remaining balance on the loan if the homeowner can find a buyer for an agreed upon price. On the other hand, the lender may retain the right to sue the homeowner for the difference of the loan that goes unpaid by the new buyer. Depending on the exact circumstances of the loan and the short sale, certain tax implications may also be encountered. A person may find themselves paying ordinary yearly taxes on the amount of the forgiven debt. A person considering a short sale should contact a tax adviser or accountant prior to agreeing to a short sale to determine what the tax implications will be. Folks considering a short sale should seek out specific advice for their specific problems, since each case can be so different.
Keep in mind that just because a person doesn’t make a profit from selling their house, it doesn’t mean that they completed a short sale. A person who has made enough of a dent in their mortgage over the years but who has come up on some financial hardship may be able to quickly sell their home below market value and still make enough money to pay off their mortgage, eliminating an entire mortgage payment from their monthly budget and being able to avoid short sale and foreclosure proceedings. In cases like these the former homeowner may better be able to handle their debts by moving to a smaller home or apartment, and since they were able to sell before a short sale or bankruptcy, they won’t have to worry about negative information impacting their credit score.
A short sale is a very attractive option for folks struggling with mortgage payments, but it is not the only option. A short sale may be a blessing to some people and a curse in disguise for others. Anyone considering a short sale should educate themselves on any consequences that may present themselves as a result of the short sale. For those who have considered the consequences and are comfortable with those consequences, no hesitation should be felt over proceeding with the short sale.
It is recommended that homeowners check with their lenders, a tax specialist, and a lawyer before proceeding with the short sale so that they can have as clear a picture of the future as possible. If a person is required to pay back or pay taxes on the difference of the short sale and the original loan, a whole new round of challenges may appear. Having this knowledge in mind before the short sale will make budgeting and finding a new place to live a much simpler task.